Michaela Whitbourn

Toni Collette and her musician husband have had a partial victory in a legal battle over a soured deal to buy a Paddington terrace, with a court reducing their damages bill for backing out of the sale by $200,000.

The NSW Court of Appeal ruled on Friday that Ms Collette and her husband, David Galafassi, should pay $602,500 to Industrie clothing label founder Susan Kelly for reneging on a 2011 agreement to buy her Stewart Street property.

This is a reduction of $212,407 on the original damages bill of $814, 907 ordered by Supreme Court Acting Justice William Windeyer last year.

The property in Stewart Street, Paddington.

The court - Chief Justice Thomas Bathurst and Justices Julie Ward and Fabian Gleeson - found that Mrs Kelly was not entitled to "special condition interest", which is paid in cases where completion of a property deal is late.

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The court found that since completion of the sale had not occurred, special condition interest did not apply.

But Ms Collette and Mr Galafassi will still have to pay most of Mrs Kelly's legal costs and forfeit their $317,500 deposit, taking the total bill to more than $920,000.

Ms Collette and Mr Galafassi had agreed to buy the terrace in September 2011 for $6.35 million.

They were due to complete the deal in December that year but backed out, claiming they did not have the money.

"We feel sick about this, you and the vendors nothing but great and we apologise profusely," the couple said in an email to McGrath real estate agent Ben Collier.

Four months later, the Kellys sold the house to Ernst & Young accountant Ian Ball for $5.5 million and Mrs Kelly sued for the difference plus interest and land tax.

Ms Collette wrote to Mrs Kelly's husband Nick in 2012, urging the couple not to proceed with the court case.

"I wanted to write to you directly in the hope that you will understand," she said in an email.

"We can no longer buy your beautiful house. We don't have the finances to go through with the purchase. For the sake of both our families I implore you to find a way to settle this less publicly."

This is likely to be the last chapter in a long-running legal battle over the property, aside from a potential fight over legal costs.

The court said that Ms Collette and Mr Galafassi should pay 65 per cent of Mrs Kelly's costs but added that "the parties should also be given the opportunity to make further submissions on costs".